The IRS has released new guidelines for withdrawals from 401(k) and Individual Retirement Accounts as a result of impacted COVID-19 situations. The guidelines indicate that people can borrow from the 401(k) and retirement accounts if they meet certain strict requirements. This was made possible by the CARES Act which offered a $2 trillion stimulus package to people impacted by the coronavirus pandemic.
The new Guidance for Coronavirus-Related Distributions and Loans From Retirement Plans Under the CARES Act is known as IRS Notice 2020-50. The conditions for eligibility include that an individual must be –
- Diagnosed with COVID-19 or have a spouse or dependent diagnosed with the disease
- Suffering severe financial difficulties as a result of the COVID-19 diagnosis or that of a spouse or family member
- Quarantined, laid off from work, or have work hours reduced because of coronavirus
- Unable to work due to inability to find childcare because of coronavirus
- Operating lesser hours on their business or have it shuttered because of COVID-19 situations
- Collecting reduced self-income from a self-owned business on account of the pandemic
- Suffering from a rescinded job offer or postponed new employment date occasioned by the COVID-19 situation
Where an employer has not implemented these rules to enable workers to qualify for withdrawal from their retirement savings and 401(k) under the IRS Notice 2020-50, an employee can still claim tax benefits after filing their tax returns.
To make things easy for people, the IRS increased the hitherto $50,000 withdrawal limit that people under the age of 60 can borrow from their 401(k) to $100,000 after any outstanding loans have been deducted. Meanwhile, any outstanding loan repayment can be delayed for one year through December 31, 2020. It must be pointed out that the new $100,000 that can be borrowed from a 401(k) account is possible up till September 22, 2020.
Again, money taken out from retirement accounts as a result of COVID-19 situations is only a loan and the income tax on it must be repaid within three years. In a situation where things get better for the individual, the loan can be repaid into the 401(k) account over a period of years.
As can be expected, financial experts warn people to withdraw from their retirement savings as a last resort only since this could impact the security of future savings. They said reduced money in retirement accounts will attract lesser returns over time, and worse still, an employee can lose their jobs while still repaying their loans. Based on this revelation, a cross-section of people said they will exercise caution in dipping their hands into their eggs nest; some said they’d rather use their emergency savings, others their IRAs, some their Health Savings Accounts, and yet some their employment-based retirement accounts.